1984 (11) TMI 45 - HC - Income Tax

Summary

Issues Involved:
1. Whether the debt had become bad in the assessment year 1960-61.
2. Whether the assessee was the owner of the machinery in lieu of the amounts due.
3. Whether the sale of assets to National Engineering Works was genuine.
4. Whether the debt could be written off as a bad debt for tax purposes.

Issue-Wise Detailed Analysis:

1. Whether the debt had become bad in the assessment year 1960-61:
The Tribunal and the High Court found that the debt had effectively become bad in the year 1953 when the mortgaged assets were handed over to the assessee. The High Court emphasized that the debt, if any, became irrecoverable in 1953 when the assessee took possession of the mortgaged property. The court stated, "In other words, there was no debtor-creditor relationship remaining after the mortgaged property came into the hands of the assessee."

2. Whether the assessee was the owner of the machinery in lieu of the amounts due:
The High Court observed that the assessee became the owner of the machinery when the mortgaged assets were handed over to him in 1953. The court noted, "The mortgage came to an end by the transfer of the property in favour of the mortgagee." Consequently, there was no outstanding debt, as the mortgage had been satisfied by the transfer of assets.

3. Whether the sale of assets to National Engineering Works was genuine:
The Tribunal and the High Court questioned the genuineness of the sale of assets to National Engineering Works, a firm in which the assessee had a significant interest. The High Court noted, "Even in 1960, there was a sale of the assets to M/s. National Engineering Works in which the assessee himself appears to be a partner. This does not seem to be a genuine effort to realise the bad debts."

4. Whether the debt could be written off as a bad debt for tax purposes:
The High Court concluded that the debt could not be written off as a bad debt for tax purposes. The court emphasized that for a debt to be written off as bad, there must be an existing debt that becomes irrecoverable. The court stated, "There being no debt, it could not become a bad debt." The court also highlighted that the primary requirement for allowing a deduction on account of a bad debt is the existence of a debt and its irrecoverability, which were not satisfied in this case.

Conclusion:
The High Court affirmed the Tribunal's decision to disallow the claim of bad debt of Rs. 37,440 for the assessment year 1960-61. The court held that the debt had effectively been settled in 1953 when the mortgaged assets were transferred to the assessee, and there was no remaining debtor-creditor relationship. Consequently, the debt could not be written off as bad in the assessment year 1960-61. The question referred to the court was answered in the affirmative, in favor of the Department and against the assessee.